Mortgage rates near bottom, so refinance now

Friday, the Federal Reserve slashed its key lending rate to banks from 4.5 percent to 3.5 percent. Banks, in turn, began cutting some consumer loan rates -- moves that could continue into this week.

Experts, though, predict long-term rates are likely to drop no more than 1/4 to 1/2 percentage point in the next three to nine months. They could start rising in the second half of 1992, when the nation's economy is expected to show a stronger recovery.

"If you hold out for the absolute lowest interest rate, you could miss it," says William Dunkelberg, dean of Temple University's School of Business and Management.

It's probably not worth waiting any longer if you've found the right home at a good price, or if you can refinance at a rate 2 percent lower than your current mortgage.

By waiting to buy, you risk losing the house you want or paying higher prices next year.

If you need to refinance, you're probably wasting money by paying a lot more interest than you'll save by waiting for rates to drop 1/2 percentage point.

Jake Haulk, senior economist at Mellon Bank in Pittsburgh, says: "If I had a 10 1/2 or 11 percent mortgage, I'd be looking very hard to get out from under it."

Many people can save $100 to $200 a month on interest costs by refinancing at 8 1/2 percent, compared with an existing mortgage at 10 1/2 percent or higher.

Despite such advantages, millions of people still haven't refinanced the double-digit-rate loans they bought between 1985 and 1990.

An estimated 1.65 million people refinanced in 1991 -- more than double last year's total -- but that's still "only the tip of the iceberg" among millions who could benefit, says Richard Peach, deputy chief economist at the Mortgage Bankers Association, an industry trade group.

The association predicts rates will drop another 1/4 percentage point during the first quarter of 1992, stabilize for several months and possibly increase 1/2 percentage point toward the end of next year.

"If the economy picks up in the second half of 1992, as we think it will, long-term rates will start to go back up," Mr. Peach says.

Mortgage rates are already the lowest in 14 years, having dropped 1 1/4 percentage points in the past 18 months.

Jeremy Siegel, professor of finance at the Wharton School at the University of Pennsylvania, says mortgage rates should continue going down because inflation remains under control and because long-term bond yields are likely to decline.

Mr. Siegel predicts rates could drop another 1/2 percentage point, to less than 8 percent, by early next year.

Still, he recommends that people act soon to buy or refinance. "Don't wait too long. If lower rates increase demand for houses, you could see your gains offset by higher home prices," Mr. Siegel says.

You should also consider how much money you're wasting every month by paying high interest rates. If you're paying 10 1/2 percent or more, you're probably better off refinancing now.

Suppose you have a $100,000 mortgage at 10 1/2 percent, with a $915 monthly payment. You could save $163 a month by refinancing at 8 1/4 percent, with a $752 monthly payment.

What if you wait three months for rates to drop another 1/4 percent? You save an extra $18 a month, or $54 total. In the meantime, you would have paid an extra $489 in interest.

You save the extra 1/4 or 1/2 percentage point only for the years you remain in the house or keep the loan. That's only eight years on average. "In most cases, people would be better off refinancing now to getting lower monthly payments," Mr. Dunkelberg says.

Follow these guidelines: Refinance as soon as possible if you're currently paying at least 2 percent higher than market rates -- anything higher than about 10 1/4 or 10 3/8 percent for a 30-year loan.

But first consider how long you plan to stay in the home. If you're going to move within three to five years, you may not save enough to cover points and other loan fees.

If you plan to move, you can reduce upfront costs by choosing a zero-point loan, but you'll pay about 3/4 of a percentage point higher interest. An adjustable-rate mortgage is another short-term option, although rates can jump significantly after the first couple of years.